Is digital disruption creating a new model of corporate growth?

Author:
Dimension Data Programme in Digital Disruption

Posted:
March 01, 2016

Source:

Page Content

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The average half-life of a business competency has dropped from 30 years (in 1984) to five years in 2014. Eighty-nine percent of the Fortune 500 in 1995 had slipped off the index by 2014, and the lifespan of the typical Standard & Poor 500 company dropped to 15 years from 67 years since the 1920s.

And here's the really thought-provoking statistic: the typical Fortune 500 company took 20 years to reach a market capitalisation of $1 billion; Google got there in eight years, Facebook in five, and Uber and What's App in under three.

Has the nature of corporate growth changed fundamentally? Is a blue-chip company just a sitting duck, about to be disrupted? Is the meteor the new model of corporate success, delivering spectacular returns out of nowhere and then disappearing again?

Excitable authors of management books and TED speakers would certainly have one believe so, but the truth is probably (as always) a little more piebald. Certainly, it does seem as though the notion of the blue-chip company has to be rethought, and that the slow, steady linear growth associated with these venerable industry leaders might no longer serve as the prime indicator of a healthy company—and thus the perfect employer or investment destination.

The very reliability of the traditional blue chip, argues Dimension Data's Baxolile Mabinya, should actually cause some alarm bells to ring. "Companies that aim to keep on growing at a steady pace, even if they have achieved it for a while, tend to become complacent," he says. "More worrying, it can be a sign that they accept unchallenged assumptions about what their economic opportunities are; also such companies often think they are innovative but aren't really."

Perhaps the real difference here is between sustaining and disruptive innovation, a distinction drawn by Professor Clayton Christensen of Harvard Business School and one of the foremost theorists of innovation. The former involves improvement (a better mousetrap), whereas the latter involves doing something that changes the game (mouseburgers).

Disruptive innovation tends to come paired with new technology of some kind, something that has led some commentators to argue that technology companies themselves are the standard-bearers of a new type of company and a new style of exponential growth. Not so, Mabinya argues, noting that most technology companies demonstrate much the same growth typology as other companies in boom industries: a lot of high valuations based on future profits, with the successful companies that actually generate profits morphing into something that greatly resembles a conventional blue chip. Microsoft or Intel spring to mind. The rest end up as stock certificates kept in some hapless investor's sock drawer: Who remembers Boo.com, one-time poster child of the tech boom of the late 1990s?

In fact, argues a white paper just published by GIBS, Digital Disruption: Changing the rules of business for a hyper-connected world[1], it's the innovative use of technology to change the competitive landscape fundamentally that underpins disruption, not the innovativeness of the technology itself. Thus Microsoft has more in common with the traditional blue chip, even though it produces innovative technology, whereas Discovery is a disruptor, because it uses technology to change the way its industry works. Google, one could argue, is a bit of both because it produces innovative technology which it uses to change markets.

It would, thus, be premature to argue that the very nature of corporate growth trajectories are changing, with no space for the blue chip delivers steady growth over sustained periods of time. Industries are never going to be in a state of disruption at all times, and while Airbnb might suit the travel plans of many, others will continue to prefer hotels. But continuous growth is no longer predictable, and will have to be earned.

The truth is that technology has become pervasive in every industry, and thus the potential for disruption is huge, be it in insurance, hospitality or civil engineering. At the same time, though, it takes time for new business models to take root, and meanwhile bridges need to get built and corduroy pants made and distributed. The incumbent market leaders—the blue chips—thus need to find ways of building disruption into their business models while they continue with their core businesses, and then find ways of integrating successful disruptions.

One example of a blue chip doing just this is GE, which has implemented an internal programme called FastWorks to stimulate innovation. Some 40 000 employees have joined and 300 pilot projects launched. GE also partnered with Quirky, a "classic" disruptive company which was attempting to provide a crowdsourcing platform for invention. Quirky has now filed for bankruptcy, seemingly because it was undertaking the manufacture of the inventions, but the important point is GE's determination to embrace disruptive ideas in order to protect its business.

Related GE projects include Healthyimagination and Ecomagination to develop new products for health care and to reduce environmental impact respectively, demonstrating the way in which the rhetoric of business growth is shifting. In this vein, Wayne Visser, Transnet Chair in Sustainable Business at GIBS and author of Sustainable Frontiers: Unlocking Change Through Business, Leadership and Innovation, sounds a caveat about the notion of adopting a model of high corporate growth as the new normal. Too often, he argues, such growth is based on the traditional "cowboy" style of business, based on expansion into a limitless world. In the modern world, however, the notion of Spaceship Earth seems more realistic, acknowledging that in fact the world is a closed system with finite resources.[2]

Of course, the spaceship view does not preclude either disruption or high growth, but it surely requires increasing amounts of corporate smarts.

Mabinya suggests that one practical strategy to pre-empt disruption would be to appoint diverse leadership teams able to challenge the "received wisdom". He points to the appointment of Mteto Nyati, a former IT Personality of the Year, as CEO of MTN in a bid to shift the company's worldview from pure telecommunications to a more broadly digital one.

Other initiatives could include building the ability to launch (and kill, if necessary) new products and services rapidly, and partnerships that will give rapid access to new markets cheaply and with minimal risk.

As the GIBS white paper notes, disruption presents threats as well as opportunities for companies. The watchword for leaders has to be vigilance in order to identify threats, external or internal, in order to pre-empt them. To understand the potential of each threat, and even to become disruptors themselves, companies pre-eminently need to understand what their core activities and assets are.

Manoj Chiba, a lecturer at GIBS, summarises: "You need to have a clear understanding of what your core offering is—if you have a basic skill, and you fulfil a real market need, the chances of disruption are low. But to achieve consistent growth, every business will have to change from time to time, simple improvement is not going to be enough."

[2] The analogy of the "cowboy" and "spaceship" economic models was coined by the economist Kenneth Boulding in a 1966 essay, "The economics of the coming spaceship Earth," available at http://dieoff.org/page160.htm.